DOCSLIB.ORG

Pegged Exchange Rate Systems in Macau and Hong Kong*

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Pegged Exchange Rate Systems in Macau and Hong Kong* 1 Pegged Exchange Rate Systems in Macau and Hong Kong* Robert Haney Scott University of Macau, Macau and California State University, Chico, U.S.A. Macau pegs its currency, the pataca, to the Hong Kong dollar, which in turn is pegged to the U.S. dollar. This type of pegging order is unique in the annals of international financial arrangements. This article analyzes the structure of the pegged exchange rate systems in Macau and Hong Kong and discusses the financial and economic implications of these systems for the two territories (JEL F33, G15). Key words: currency board system, currency substitution, pegged exchange rates, seigniorage. I. Introduction Following the speculative attack on the Hong Kong dollar (HK dollar) in September of 1983, the Hong Kong government pegged the HK dollar to the U.S. dollar at 7.80/1.00, which has remained the same since then.1 This peg is a currency-based peg in that the exchange of HK dollar currency for U.S. dollar currency takes place only between banks and the government’s Exchange Fund. Because of processing costs, the banks charge a commission fee of 1 percent on each transaction initiated by non-bank customers. Therefore, the exchange rate for bank deposit * A portion of this article was presented at the symposium on Macau and Its Neighbors in Transition held at the University of Macau on March 18–19, 1996. The author would like to thank Ms. Winnie Kuan for valuable assistance in the preparation of the article and the referees and managing editor of the MFJ for helpful comments. 1. Before the peg, there existed a government ordinance in Hong Kong called the Prohibition of Circulation of Foreign Currency to help strengthen the circulation of the HK dollar. The ordinance was abolished a few years after the establishment of the pegged system. (Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 153–168) © by Multinational Finance Society, a nonprofit corporation. All rights reserved. DOI: 10.17578/1-2-5 154 Multinational Finance Journal money varies by 1 percent above and below the above pegged rate. The peg has made the HK dollar widely acceptable in foreign trade. However, the HK dollar has not been as widely acceptable in international trade as the U.S. dollar. Macau pegs the pataca to the HK dollar at 1.03/1.00, with an effective 1 percent range above and below. In 1993, the government of Macau passed an ordinance requiring local businesses to list the prices of goods in patacas, probably because of fear that the HK dollar might displace the pataca in Macau. Nevertheless, the government does not discourage the circulation of HK dollars and other foreign currency in Macau. Bank automatic teller machines (ATMs) in Macau dispense bank notes in either of the two currencies.2 Having one currency pegged to another currency, which in turn is pegged to the U.S. dollar, is unique in the annals of international financial arrangements. Moreover, the fact that the HK dollar is widely used in local trade in Hong Kong raises a question of whether a currency with less intrinsic value (HK dollar) is driving out a currency with the higher intrinsic value (US dollar) that can easily be sent out of the country for deposit as “bullion” in foreign banks, as anticipated by Gresham’s Law. Gresham’s Law, named after Sir Thomas Gresham, states that bad money drives out good money. A definition for Gresham’s Law is found in Webster’s Ninth New Collegiate Dictionary :“ . when two coins are equal in debt-paying value but unequal in intrinsic value, the one having the lesser intrinsic value tends to remain in circulation and the other tends to be hoarded or exported as bullion.” The reference pertains to a bimetallic currency system and the term intrinsic value clearly refers 2. Macau, established in 1557, is a Portuguese-administered territory across the Pearl River Estuary to the west of Hong Kong. It is expected to become a special administrative region of China on December 20, 1999. For nearly 300 years, its harbors kept Macau one of the richest cities in the world. However, when the British developed Hong Kong, with its deep water port, Macau’s predominance faded. It is now a center for gambling. Each weekend, thousands of Hong Kong gamblers journey by ferry or helicopter across 60 kilometers of the Pearl River Estuary to gamble in Macau’s casinos. Macau is one of the smallest modern economies in the world to maintain its own currency. Its population is about half a million and its land area is less than ten square miles. In contrast, Hong Kong’s population is over 6 million and its land area is about 400 square miles. Both territories have large areas of steep rocky hillsides that are not suitable for cultivation or habitation. China maintains a special economic zone to the north of Hong Kong, called Shenzhen, and one to the north of Macau called Zhuhai. Both zones have grown rapidly during the past 15 years. There is no sales tax in Macau but, as in Hong Kong, there is a tax on business profits, gambling profits, and salaries above a certain level. Pegged Exchange Rates 155 to the market value for metals set in international trade. The purpose of this article is to analyze the structure of the pegged exchange rate systems in Macau and Hong Kong and discuss the financial and economic implications of these systems for the two territories. The article proceeds as follows: Section II presents a brief literature review on currency substitution and presents statistics for Hong Kong and Macau. Section III discusses the mechanism and types of seigniorage earned by the governments in Macau and Hong Kong. Section IV elaborates on the notion of intrinsic value of paper money. Section V explores the financial and economic implications of the pegged exchange rate systems in the two territories. Section VI presents a brief summary and concluding remarks. II. Currency Substitution A. Literature Review The early literature on currency substitution revolves around the issue of the substitution of hard currencies for weak and volatile currencies of smaller countries. Aliber (1967) investigates the relation between changes in asset preferences and the demand for international reserves. He concludes that when prices of reserve assets are pegged, some mechanism to adjust their relative supply and demand is necessary to prevent hoarding of one asset or the other. McKinnon (1982) examines the implications of major currency substitution for the stability of money demand functions and recommends that the Federal Reserve should, in the interest of monetary stability, discontinue its policy of passively sterilizing the domestic monetary impact of foreign official interventions. Aiyagari (1989) explores the impact of asymmetric information on currency substitution. He concludes that higher quality assets are hoarded for future consumption, whereas lower quality assets are exchanged for current consumption. Thus, bad assets circulate faster than good assets.3 Miles (1978) suggests that the elasticity of substitution between currencies should be the variable of focus in empirical studies of currency substitution rather than the interest elasticity of demand. Calvo and Rodriguez (1978), using a rational expectations model of exchange rate determination, find that an increase in the money supply in a small open economy leads to an instantaneous 3. See Aiyagari (1989), p. 692. 156 Multinational Finance Journal deterioration of the real exchange rate. Craig (1997) provides a brief history of several dual currency regimes that existed in America from colonial to modern times. He suggests that perhaps smart-card money will spread to become the substitute currency in countries around the world. Jao (1992) documents a significant amount of currency substitution as a result of the speculation against the HK dollar that occurred a month prior to the installation of the pegged exchange rate system in Hong Kong. He finds that in a pegged exchange rate system where adequate reserves are held, exchange rate volatility due to speculation has a minor effect on currency substitution. Currency substitution takes place because of concerns over the intrinsic value of the currency. B. Currency Substitution in Hong Kong and Macau To ensure clarity, it is important to define the terms currency in circulation, money, and currency substitution. Currency in circulation includes domestic and foreign coins and notes. Money, as measured by M1, includes currency in circulation and demand deposits in domestic banks, whereas M2 also includes time deposits. The deposits can be in domestic or foreign currency. The term currency substitution refers to the case where money in one country includes foreign coins, notes, and deposits. Thus, currency substitution refers to the use of another country’s currency. In the discussion that follows, the term currency is used loosely to include coins, notes, and deposits. Panel A of table 1 presents estimates of the composition of M1 and M2 money in Hong Kong during the period 1987–96. The results show that, on average, HK$ and Fx make up 90 percent and 10 percent of M1, respectively. Except for the years 1990 and 1991, the proportions of HK$ and Fx to M1 remain close to their average figures. The results for M2 are, however, different. The last two columns of panel A, show that the HK$ and Fx make up about 45 and 55 percent of M2, respectively. This is because Hong Kong is an international banking center, thus, a large percentage of foreign currency (Fx) is held in the form of time deposits. The figures for Fx indicate that there is a relative increase in currency substitution in Hong Kong during the period 1987–90 and a relative decrease in currency substitution thereafter.
Load more

Recommended publications
  • Treasury Reporting Rates of Exchange As of March 31, 1994
    iP.P* r>« •ini u U U ;/ '00 TREASURY REPORTING RATES OF EXCHANGE AS OF MARCH 31, 1994 DEPARTMENT OF THE TREASURY Financial Management Service FORWARD This report promulgates exchange rate information pursuant to Section 613 of P.L. 87-195 dated September 4, 1961 (22 USC 2363 (b)) which grants the Secretary of the Treasury "sole authority to establish for all foreign currencies or credits the exchange rates at which such currencies are to be reported by all agencies of the Government". The primary purpose of this report is to insure that foreign currency reports prepared by agencies shall be consistent with regularly published Treasury foreign currency reports as to amounts stated in foreign currency units and U.S. dollar equivalents. This covers all foreign currencies in which the U.S. Government has an interest, including receipts and disbursements, accrued revenues and expenditures, authorizations, obligations, receivables and payables, refunds, and similar reverse transaction items. Exceptions to using the reporting rates as shown in the report are collections and refunds to be valued at specified rates set by international agreements, conversions of one foreign currency into another, foreign currencies sold for dollars, and other types of transactions affecting dollar appropriations. (See Volume I Treasury Financial Manual 2-3200 for further details). This quarterly report reflects exchange rates at which the U.S. Government can acquire foreign currencies for official expenditures as reported by disbursing officers for each post on the last business day of the month prior to the date of the published report. Example: The quarterly report as of December 31, will reflect exchange rates reported by disbursing offices as of November 30.
    [Show full text]
  • BULLETIN CZECHOSLOV Akla - President: Dr
    ISSN 0739-1390 ICTM NATIONAL COMMITTEES AUSTRALIA - Chairman: Dr. Stephen Wild Musicological Society of Australia, GPO Box 2404, Canberra, ACT 2601 BULGARIA -SuiuznaBulgarskiteKompositori, 2 Ivan Vazov, Sofia 1000 BULLETIN CZECHOSLOV AKlA - President: Dr. Oskar Elschek SA V, Umenovedny Ustav, Fajnorovo nabr.l, 884 16 Bratislava DENMARK - President: Dr.Lisbet Torp of the Dansk Selskab fl<'rTraditionel Musikog Dans, Kzrsangervej 23, OK -2400 CopenhagenNV FEDERAL REPUBLIC OF GERMANY- Chairman: Prof. Dr. Marianne Brocker Abt. Volksmusik, UniversitatBamberg, Feldkirchenstr. 21, 0-8600 Bamberg INTERNATIONAL COUNCIL FINLAND - Secretariat Kansanmusiikin Keslcusliitto, P.O.Box 19, SF-0053I Helsinki 53 HUNGARY - Secretary: Prof. Laszlo Vik:ir for MT A, Zenetudomanyi 1ntezet, Pf. 28, H-1250 Budapest IT AL Y - Chairman: Prof. Tullia Magrini TRADITIONAL MUSIC clo DipartimentodiMusica,ViaGalliera 3,140121 Bologna JAMAICA - Chairman: Dr. Olive Lewin Institute of Jamaica, 12 East Street, Kingston R.O.KOREA - Chairman: Prof. Hahn Man-young College of Music, SeoulNationalUniversity,Seoul 151 NETHERLANDS - President: Or. Wim van Zanten Nl.VerenigingEtnomusicologie· AmoldBake',POB l0088,NL-lOOI EB Amsterdam No. LXXVIII NORWAY -President: Bjem Aksdal Norskfolkemusikklag, Radet f. Folkemusikk og Folkedans, N -7055 Dragvoll April 1991 OMAN - Oman Centre for Traditional Music, P.O.B.2000, Seeb POLAND - President: Prof. Anna Czekanowska Institute of Musicology , Warsaw University, 02-089 Warsaw ROMANIA - President: Prof. Tiberiu Alexandru 1ntr. Tirgu-FrumosNr.7, #20, R-75357 Bucuresti SWEDEN - President: Or. Krister MaIm I With c/o Musikmuseet, Box 16326, S-103 26 Stockholm Preliminary Program of the SWITZERLAND - President: Dr. Brigitte Bachmann-Geiser Sonnenbergrain 6, CH-3013 Bern 1991 CONFERENCE UNION OF SOVIET SOCIALIST REPUBLICS - President: Tikhon Khrennikov Union of Composers of the USSR, ul.
    [Show full text]
  • Currency Substitution: the Use of Hong Kong Dollars in Southern China
    Journal of Economic Integration 17(3), September 2002; 596-607 Currency Substitution: The Use of Hong Kong Dollars in Southern China Kui Yin Cheung and Chengze Simon Fan Lingnan University Abstract This paper studies the circulation of Hong Kong dollars in the Chinese Mainland. It first estimates the amount of Hong Kong dollars circulating in southern China in the last fifteen years. The regression analysis indicates that the growth rate of Hong Kongs foreign direct investment in China and the growth rate of trade volume between Hong Kong and China are some of the main determinants that contribute to the widespread use of Hong Kong dollars in southern China. The difference of real returns between Hong Kong dollar denominated assets and Chinese Renminbi denominated assets, however, has no effect on the amount of Hong Kong dollars circulating in China. • JEL Classifications: E41, F36 • Key Words: Currency Substitution, Hong Kong Dollars, Hong Kong I. Introduction Currency substitution is an important issue in international macroeconomics because it is often regarded as a major contributing factor in the economic interdependence of countries. For instance, currency substitution has important impact on the exchange rate (McKinnon, 1982). In the face of exogenous changes in the expected rate of depreciation, Girton and Roper (1981) show that the exchange rate volatility increases with the degree of currency substitution. Furthermore, currency substitution may transmit the effect of monetary disturbances from one country to another (Miles, 1978). This paper attempts to *Corresponding address: Kui Yin Cheung, Department of Economics, Lingnan University, Tuen Mun, N.T., Hong Kong, Tel: +852-2616 7187, Fax: +852-2891-7940, E-mail: [email protected] 2002-Center for International Economics, Sejong Institution, All Rights Reserved.
    [Show full text]
  • What If the Hong Kong Dollar Repegs to the Renminbi?
    Market Views – July 2020 WHAT IF THE HONG KONG DOLLAR REPEGS TO THE RENMINBI? Russell Clark’s Market Views “If US sanctions deny Hong Kong access to the US dollar, it could repeg to the Chinese Yuan. How would this impact dual listed equities?” The Trump Administration is considering sanctions against China and Hong Kong due to the imposition of their national security laws. The Hong Kong Autonomy act (HR7440) includes provisions to limit Hong Kong banks access to the US dollar. Hong Kong has a peg to the US dollar with local rates typically following US rates, apart from periods of Asian currency strength or weakness. Hong Kong Interbank Offered Rate (Hibor), London Interbank Offered Rate (Libor) If Hong Kong was denied access to US dollar under US sanctions, it could repeg to the Chinese Yuan. If this were to happen, the first change would be that Hong Kong Interbank Offered Rate (Hibor) rates would need to move close to Chinese Shanghai Interbank Offered Rates (Shibor). At current rates, this would mean that Hong Kong interest rates would rise, potentially negatively for property in Hong Kong, but the higher interest rate would help stabilise the exchange rate. RUSSELL CLARK – MARKET VIEWS RUSSELL CLARK – WHAT IF THE HONG KONG DOLLAR REPEGS TO THE RENMINBI? There are currently restrictions on the Chinese capital account. Perhaps the bigger question would be whether China would impose capital flow restrictions on the Hong Kong dollar, or whether the repegging of the Hong Kong dollar to the Renminbi would coincide with a general loosening of capital account restriction in mainland China? If the US dollar weakened, China opening its capital account becomes more likely.
    [Show full text]
  • Before the Fall: Were East Asian Currencies Overvalued?
    Emerging Markets Review 1Ž. 2000 101᎐126 Before the fall: were East Asian currencies overvalued? Menzie D. ChinnU Council of Economic Ad¨isers, Rm 328, Eisenhower Executi¨e Office Bldg., Washington, DC 20502, USA Received 10 October 1999; received in revised form 4 February 2000; accepted 5 April 2000 Abstract Two major approaches to identifying the equilibrium exchange rate are implemented. First, the concept of purchasing power parityŽ. PPP is tested and used to define the equilibrium real exchange rate for the Hong Kong dollar, Indonesian rupiah, Korean won, Malaysian ringgit, Philippine peso, Singapore dollar, New Taiwanese dollar and the Thai baht. The calculated PPP rates are then used to evaluate whether these seven East Asian currencies were overvalued. A variety of econometric techniques and price deflators are used. As of May 1997, the HK$, baht, ringgit and peso were overvalued according to this criterion. The evidence is mixed regarding the Indonesian rupiah and NT$. Second, a monetary model of exchange rates, augmented by a proxy variable for productivity trends, is estimated for five currencies. An overvaluation for the rupiah and baht is indicated, although only in the latter case is the overvaluation substantialŽ. 17% . The won, Singapore dollar and especially the NT$ appear undervalued according to these models. ᮊ 2000 Elsevier Science B.V. All rights reserved. JEL classifications: F31; F41; F47 Keywords: Equilibrium exchange rates; Overvaluation; Purchasing power parity U Tel.: q1-202-395-3310; fax: q1-202-395-6583. E-mail address: [email protected]Ž. M.D. Chinn . 1566-0141r00r$ - see front matter ᮊ 2000 Elsevier Science B.V.
    [Show full text]
  • A Model of Currency Substitution in Exchange Rate Determination, 1973-78
    A Model of Currency Substitution in Exchange Rate Determination, 1973-78 ARTURO BRILLEMBOURG and SUSAN M. SCHADLER * д т THE OUTSET of the current floating exchange rate regime, jfTi expectations were widespread that the new system would allow countries a high degree of policy independence yet reduce strains on the free international movement of goods, services, and capital. Even long-standing critics of exchange rate flexibility seemed unable to oppose meaningfully the advent of flexible exchange rates in the face of the severe strains of reserve changes and international payments imbalances. Domestic financial pol- icies and economic performance in the major industrial countries had diverged to such an extent that fixed relationships among currencies were obviously unfeasible. After several years' experience with floating exchange rates, however, it is far from clear that exchange rate flexibility enhances the ability of coun- tries to pursue their own chosen policies without contributing to severe disruptions in the international monetary system. In fact, as experience with the regime grows, a number of the fun- damental tenets of flexible exchange rate advocates are being called into question. The long-standing case for floating exchange rates has centered principally around the argument that exchange rate flexibility allows individual countries to choose financial policies indepen- dently while removing the burden of intervention on those coun- * Mr. Brillembourg, economist in the Special Studies Division of the Research Department, is a graduate of Harvard University and of the University of Chicago. Ms. Schadler, economist in the Special Studies Division of the Research Department, holds degrees from Mount Holyoke College and the London School of Economics and Political Science.
    [Show full text]
  • The Implications of Currency Substitution Experiencesin Latin America and in Eastern Europe for Cuba
    The Implications of Currency Substitution Experiencesin Latin America and in Eastern Europe for Cuba Lorenzo L. Pérez. International Monetary Fund [1] I. Introduction This paper assesses the experience of dollarization and currency substitution in Latin America and in Eastern Europe and analyzes the implications of this phenomena for Cuba. Under conditions of high inflation, the ability of national currencies to function adequately as a store of value, a unit of account, and a means of exchange is hindered. In these circumstances, the domestic currency tends first to be displaced as a store of value by a stableand convertible currency (usually in the form of interest-bearing foreign currency deposits); this phenomenon is known in the literature as dollarization.[2] Long periods of high inflation induce the public also to conduct transactions in foreign currency, a process which is usually referred in the literature as currency substitution. Both types of experiences are occurring in Cuba. SectionII summarizes the measures taken by the Castro Government to allow the circulation of freely convertible currencies (mostly U.S. dollars) in Cuba. SectionIII discusses the reasons of why dollarization and currency substitution take place, and the form and extent that it has taken place in Latin America and European countries. SectionIV discusses the advantages and disadvantages of allowing a foreign currency as legal tender. SectionV draws conclusions from the experience of other countries for Cuba's recent dollarization and currency substitution developments and the implications for the future. II. Cuba's Experience with Dollarization and Currency Substitution Prior to the summer of 1993, U.S.
    [Show full text]
  • RMB on HK.Pdf (1.154Mb)
    SAE./No.83/July 2017 Studies in Applied Economics AN ANALYSIS OF THE IMPACT OF RMB DEPRECIATION ON HONG KONG Richard (Ziyuan) Li Johns Hopkins Institute for Applied Economics, Global Health, and Study of Business Enterprise An Analysis of the Impact of RMB Depreciation on Hong Kong By Richard (Ziyuan) Li Copyright 2017 by Richard Li. This work may be reproduced provided that no fee is charged and the original source is properly cited. About the Series The Studies in Applied Economics series is under the general direction of Professor Steve H. Hanke, Co-Director of The Johns Hopkins Institute for Applied Economics, Global Health and the Study of Business Enterprise ([email protected]). The authors are mainly students at The Johns Hopkins University in Baltimore. Some performed their work as summer research assistants at the Institute. This working paper is one in a series on currency boards. The currency board working papers will fill gaps in the history, statistics, and scholarship of the subject. About the Author Richard Li ([email protected]) is a graduate student at The Johns Hopkins University in Baltimore, pursuing a master’s degree in Financial Mathematics. He wrote this paper as a research assistant at the Institute for Applied Economics, Global Health, and the Study of Business Enterprise in Spring 2017. He will graduate in December 2017. Abstract Hong Kong is one of the main economies operating a currency board system today. With its currency fixed to the U.S. dollar, the system has functioned successfully since it was restarted in 1983. The last time it faced severe challenges was during the East Asian financial crisis of 1997-98.
    [Show full text]
  • Media Freedom in Chinese Hong Kong Richard Cullen City University of Hong Kong, Hong Kong
    Global Business & Development Law Journal Volume 11 | Issue 2 Article 3 1-1-1998 Media Freedom in Chinese Hong Kong Richard Cullen City University of Hong Kong, Hong Kong Follow this and additional works at: https://scholarlycommons.pacific.edu/globe Part of the International Law Commons Recommended Citation Richard Cullen, Media Freedom in Chinese Hong Kong, 11 Transnat'l Law. 383 (1998). Available at: https://scholarlycommons.pacific.edu/globe/vol11/iss2/3 This Article is brought to you for free and open access by the Journals and Law Reviews at Scholarly Commons. It has been accepted for inclusion in Global Business & Development Law Journal by an authorized editor of Scholarly Commons. For more information, please contact [email protected]. Article Media Freedom In Chinese Hong Kong Richard Cullen* TABLE OF CONTENTS I. INTRODUCTION ............................................... 384 U. BACKGROUND ............................................... 386 A. The ColonialEra ......................................... 386 B. The TransitionalPeriod ................................... 387 C. Points of Conflict ......................................... 388 III. OVERVIEW OF THE MEDIA IN HONG KONG ......................... 391 IV. THE REGULATORY FRAMEWORK .................................. 396 V. THE JUDICIARY AND THE MEDIA ................................. 399 A. Introduction ............................................. 399 B. The Press in Court ........................................ 402 C. Summary ..............................................
    [Show full text]
  • Currency Risk Management for Hong Kong Insurers: Prepare for the Next Unpeg
    Article from Risk Management January 2016 Issue 34 Currency Risk Because of the currency peg Management for Hong system, the exchange rate move between 7.75 and 7.85, a pretty Kong Insurers: prepare narrow range. Hence, so far, the for the next unpeg FX mismatch risk is very well By Questor Ng contained. he Swiss franc peg was introduced in 2011 in response to social, economic and political conflicts in Hong Kong. Many an- investors buying up substantial amount of the currency as alysts are now speculating as to should the HKD be de-pegged. Ta safe haven asset. On Jan. 14, 2015, the Swiss franc was trading around 1.2, at the minimum exchange rate of 1.20 francs THE INSURANCE INDUSTRY to the euro cap. On Jan. 15, with no hints from the central bank, UNDER THE CURRENCY PEG the Swiss government announced the removal of the three year The insurance industry in Hong Kong has a long history of 170 old Swiss franc to euro ceiling policy. The euro dropped as low years. There are over 150 authorized insurers. In 2014, the total as to 30 percent against franc, plunged to 0.85 francs per euro gross premiums of the Hong Kong insurance industry increased at one point. The central bank also cut its main interest rate to by 13.3 percent to HK$339 billion. If the currency peg is re- -0.75 percent—a move further into negative interest territory. moved suddenly, there would possibly be material impact on the industry. The sudden death of the Swiss franc ceiling policy demonstrates the kind of currency volatility and impact when a currency peg The liability side is removed.
    [Show full text]
  • Internationalisation of the Renminbi
    Internationalisation of the renminbi Haihong Gao and Yongding Yu1 Introduction Over the past three decades, China’s fast economic growth and its increasing economic integration with the world have led to a significant increase in its influence in the world economy. During the Asian financial crisis of 1997–98, China was praised as a responsible country, because of its efforts in maintaining the stability of the renminbi while many other countries in the region had devaluated their currencies. It was the first time that China itself, as well its Asian neighbours, started realising China’s emerging influence. Like it or not, China is no longer an outsider in global financial events. This is not only because China is now the world’s third largest economy and second largest trading nation, but also because it holds the largest amount of foreign reserves in the world. Since the Asian financial crisis, China has been faced with three major tasks with regard to its international financial policies. The first is the reform of the global financial architecture. The second is the promotion of regional financial cooperation, which consists of two components: the creation of a regional financial architecture and the coordination of regional exchange rate arrangements. The last is internationalisation of the renminbi. It is fair to say that, over the past 10 years or so, the most discussed issue in China has been regional financial cooperation. Although the result is still highly unsatisfactory, together with its East Asian neighbours China has achieved some tangible results, built on the basis of the Chiang Mai Initiative (CMI).
    [Show full text]
  • A Study of the Internationalization of the Chinese Renminbi ——To Access Its Risks
    A Study of the Internationalization of the Chinese Renminbi ——to access its risks Number of keystrokes:96896 ! Master Thesis by: Supervised by: Youran Wang Bill Liu Jesper Willaing Zeuthen May 2018 Aalborg University, China and International Relations Abstract Since 2009, the People's Bank of China has focused on the liberalization of trade and investment, establishing a policy framework to facilitate international use of renminbi. On October 1, 2016, the RMB was formally included in the SDR currency basket of the International Monetary Fund. This is an important milestone in the process of RMB internationalization. However, over the past two years, the global use of renminbi as a payment currency has declined. Fitch Ratings suggests that China’s policy of restricting capital outflows and global concerns about the devaluation of renminbi impede the internationalization of the currency in the short term. From the end of last year 2017, things have changed. The cross-border use of renminbi has been expanded, and new progress has been made in the internationalization of renminbi. There are several factors that promote renminbi internationalization in the long term. The “One Belt and One Road” initiative suggests global participants also cooperates in the increased international use of RMB. The Renminbi Cross-Border Payment System (CIPS) promoted the opening of China's capital market and brought more opportunities for RMB product innovation in the global markets. Hong Kong RMB offshore financial center continues to develop and serve as an intermediary for RMB to go to globe. According to SWIFT, 49.4% of renminbi payment transfers through Hong Kong.
    [Show full text]